Summary

UBS AG (NYSE:UBS), the purveyor of the ETRACS exchange traded notes, launched a leveraged S&P 500 ETN which resets its holdings on a monthly basis.

According to a press release, the ETRACS Monthly Reset 2xLeveraged S&P 500 Total Return ETN (NYSEARCA:SPLX) began trading Wednesday, March 26.

The ETN tries to reflect the monthly compounded 2x, or 200%, leveraged performance of the S&P 500 Total Return Index. Paul Somma, Senior ETRACS Structurer, said in the press release:

The S&P 500 Total Return Index is widely regarded as the best gauge of large cap US equities and a bellwether for the U.S. economy. SPLX allows investors to get 2x leveraged exposure to this benchmark index by way of a product whose leverage resets monthly and not daily.

Most leveraged exchange traded funds reset holdings on a daily basis. For instance, the ProShares Ultra S&P500 (NYSEARCA:SSO), the largest leveraged ETF with $3.2 billion in assets under management, tries to reflect the 2x daily return of the S&P 500.

Due to the compounding effects, leveraged fund investors may enjoy higher gains in trending markets, such as in 2013, but they must also be willing to accept heavier losses, especially in volatile market conditions.

Compounding can affect leveraged ETFs differently in varying market conditions. For example, in an upward-trending market, compounding can result in long-term returns that are greater than the sum of the individual daily returns, according to ProShares. In a downward-trending market, it can show long-term results that are less negative than the sum of individual daily returns. However, the long-term results are less than the sum of the individual daily returns in volatile market conditions when markets swings are a daily event. According to Morningstar analyst, Michael Rawson:

Over periods longer than one day, a constant holding in leveraged bull and bear funds can both have negative compound returns because of the amplified volatility drag. Avoiding this volatility drag requires daily rebalancing.

By resetting holdings on a monthly basis, SPLX may more closely track its 2x target during volatile market conditions over longer periods, providing investors more leeway in holding onto the leveraged product. However, the ETN may not fully benefit from the compounding effects during a trending bull market, as compared to leveraged ETFs that rebalance on a daily basis.

Max Chen contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.